Cold Storage Wallet vs. Hot Wallet: What Is It and How to Use It

Spend a day on any cryptocurrency forums online, and you will never miss the eternal war between cold wallets vs. hot wallets. So, what’s the best place to store your cryptocurrency?

Following the rise of Bitcoin in 2009, cryptocurrency has grown from a niche concept to becoming an overnight success. Making it necessary for users to keep their coins in a safe place. In response, a crypto wallet was created to give users the safest and most secure way of storing their cryptocurrencies while still giving them access to them.

Cold storage and hot wallets are the two leading crypto wallets with varying security, functionality, and accessibility levels. Here’s what you need to know!

The Cold Storage Wallet

Cold storage wallets are cryptocurrency wallets that do not have internet access. They operate similarly to physical wallets, which store cash. The cold wallet depends on both private and public keys. The private keys enable users to verify and unlock the received cryptocurrency transactions, while the public key enables the receipt of cryptocurrency transactions.

The cold storage wallet protects the data from hacking and interception electronically by storing data in an offline physical form. One of the most significant advantages of cold wallets is that your cryptos will be right by your side – wherever you are. Since these wallets are small and compact, you would never have to remove the device from your pocket, enabling you to carry it comfortably and discreetly.

Cold storage methods often consist of paper wallets and hardware wallets, but they don’t support as many cryptocurrencies and tend to be more expensive than hot wallets.

How to Use the Cold Storage Wallet

  1. First, connect the cold storage wallet to your computer.
  2. You then select the option to receive crypto, and you will receive an address.
  3. You can store your crypto on your cold wallet using the generated address.

Once you disconnect the device from your computer, your public and private keys are no longer accessible. You can also use the same process to move crypto from your cold wallet to a different address. Connect the device to the computer, type the address and send.

The Hot Wallet

A hot wallet always connects to the internet that you can access via your mobile phone or a web browser. The hot wallet allows you to trade cryptocurrencies and keep track of your tokens balance. Mobile wallets, web-based wallets, and desktop wallets are all common hot wallets. Even though cyber-attacks can happen to any crypto hot wallet, web wallets are the least secure.

Hot wallets are easy to use. Since they are always online, making a cryptocurrency transaction does not require a transition between online and offline like cold storage wallets. With a hot wallet, you can quickly transfer crypto to exchange for more trading or withdrawing your coins, and your coins are more secure than keeping them in the exchange. Moreover, many hot wallets are free.

In most cases, large cryptocurrency holders will not store significant amounts of cryptocurrency in hot wallets because hot wallets can be hacked more quickly due to the internet.

Hot Wallet: How It Works

  1. Connect the hot wallet to a server to initiate a cryptocurrency transaction. Unlike a cold wallet, it does not store virtual currencies.
  2. The hot wallet’s private key verifies financial transactions digitally by signing and authorizing them.
  3. The user begins mining the cryptocurrency, and the public key enforces a chronological order to protect the neutrality of the cryptocurrency network.
  4. The holder then determines how to store the tokens and will require a signature to facilitate the transaction. The cryptocurrency network then transmits the transaction.

Over time, records stored on blockchains become part of the public ledger.

Cold Storage Wallet vs. Hot Wallet

The main difference between the two crypto wallets is that the hot wallet connects to the internet. However, here’s how the cold storage and hot wallets compare:

  • Security: Cold wallets are known for being impenetrable because they are offline. Even though hot wallets provide high levels of security, the fact that they are online makes them vulnerable to hacking.
  • Cost: Most hot wallets are free, whereas hardware wallets for cold storage are not. But it is possible to create a free cold wallet by storing crypto keys on a piece of paper.
  • Convenience: Hot wallets are easier to use. They allow faster cryptocurrency transactions than using a cold wallet.

Getting the Best of Both Crypto Wallets

Combining cold storage and hot wallets is ideal when considering the trade-offs between the two crypto wallets. A hot wallet should offer ease of access, and a cold wallet should provide security and peace of mind. With each crypto wallet, you can use it for a specific purpose, thereby creating an easy-to-use and secure way to use and trade cryptocurrencies. Store cryptocurrency in cold storage for the most part but use hot wallets for smaller transactions and day-to-day trading.

It’s also a good idea to use a second phone only for cold crypto storage. Make sure that the phone is only on during transactions if using it for a cold wallet. You can use WiFi or Bluetooth, pair your main device to the secondary phone that serves as the cold wallet is linked and send money to the hot wallet during the transaction. After completing the transaction, turn off the Bluetooth or WiFi as the secondary phone shuts down.

Choosing the Right Crypto Wallet!

Investing in cryptocurrency comes with a lot of considerations. Even though it makes sense to combine both the cold storage wallet and hot wallet, it is first necessary to decide how you wish to invest before choosing a wallet.